Three Banking Failures Cost FDIC $300 Million

January 15, 2010 – Regulators Close 3 Banks

Regulators closed three banks today in Utah, Minnesota and Illinois.  The three failed banks had total assets of $922.1 million and total deposits of $877.3.  The total cost to the FDIC Deposit Insurance Fund for the three failed banks is estimated at $296.3 million or 32% of total assets.  Two of the failed banks were taken over by other institutions under purchase and assumption agreements with the FDIC.  The third and largest failed bank of the week, Barnes Banking, will be liquidated by the FDIC since no other institution could be found to assume the failed bank’s deposits or assets.

The vast majority of the banking failures over the past two years were resolved the FDIC and an acquiring bank entering into a purchase and assumption agreement, whereby the acquiring bank assumes the deposits and assets of the failed bank.  In protect depositors and arrange a speedy resolution of a failed bank, the FDIC enters into a loss-share transaction with the acquiring bank.  The loss-share transaction typically involves the FDIC agreeing to absorb a large percentage of losses that an acquiring bank may experience on the purchase of a failed bank’s assets.

Despite the generous FDIC guarantees against loss, one of this week’s three failed banks found no acquiring bank.  The FDIC was left holding $828 million of failed bank assets to be held for later disposition.   As of September 30, 2009, the FDIC was already holding $30.3 billion in failed assets for future resolution and disposition.

JP Morgan’s quarterly report just released shows that banks are still struggling with increasing defaults on their mortgage and consumer loan portfolios and are not eager to take over struggling asset portfolios of failed banks.   In addition, if the economy weakens as some expect, loan defaults could surge even higher which would cause surviving banks to become even more risk adverse.

The three failed banks for January 15, 2010 are as follows:

Town Community Bank and Trust, Antioch, Illinois – Number 2

The FDIC entered into a purchase and assumption agreement with  First American Bank of Elk Grove Village, Illinois to assume all of the deposits and virtually all of the assets of failed Town Community.  This small failed bank had total assets of $69.6 million and total deposits of $67.4 million in deposits.

The FDIC and First American Bank entered into a loss-share transaction on $56.2 million of the failed bank’s assets.  The loss to the FDIC on this banking failure is estimated at $$17.8 million.

St. Stephen State Bank, St. Stephen, Minnesota – Number 3

The FDIC entered into a purchase and assumption agreement with First State Bank of St. Joseph, St. Joseph,  Minnesota to assume all of the deposits  and assets of  St. Stephen Bank.  This tiny failed bank had $24.7 million in assets and $23.4 million in deposits.

The FDIC and First State Bank entered into a loss-share transaction on $20.4 million of the failed bank’s assets.   The loss to the FDIC on this banking failure is estimated at $7.2 million.

Barnes Banking Company, Kaysville, Utah – Number 4

The FDIC could not find another bank to assume the deposits or assets of this failed bank.  Due to this fact, the FDIC created a deposit insurance national bank (Deposit Insurance National Bank of Kaysville DINB)  to protect depositors.

The DINB will remain open only until February 12, 2010, during which time depositors must transfer their insured funds to another banking institution.  Checks from the FDIC for certificates of deposits and IRAs will be mailed directly to customers.  Checks for brokered deposits will be sent by the FDIC to the brokers for forwarding to customers.  Insured depositors who do not withdraw or transfer their insured deposits by February 12, 2010 will have checks mailed to them for their insured deposits by the FDIC.   At the time of closing, depositors at Barnes Banking had approximately $100,000 in deposits that exceeded the FDIC deposit insurance limits.  It is highly probable, based on the size of the FDIC loss on Barnes Banking,  that these uninsured depositors will never be reimbursed for their losses.

At the time of closing, Barnes Banking had $827.8 million of assets and $786.5 million in deposits.   The FDIC as receiver will retain all assets for later disposition.   It should be interesting to see what price the FDIC ultimately sells the failed bank’s assets for at auction, since at the time of closing, no other banks were apparently interested in acquiring them.  The loss to the FDIC for the failure of Barnes Banking is estimated at $271.3 million or 32% of total assets.

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